Budgeting issues and Monitoring

High School ・Business ・APA ・2 Sources

This paper outlines the capital spending for Hot New Café, a fanciful and well established coffee outlet. Financial details Anticipated sales for the next 5 years = $800,000 Direct outgoings (labor and materials inclusive) =$400,000 (50% sales) Indirect outgoings = $100,000 per year Valuation for building café= $750,000 Marginal tax rate= 37% Value of capital= 12% Question 1a): Determine the period of payback Payback period = initial cash outlay (investment) / annual cash inflow Total investment =(value of building) =750,000 Annual net cash inflow= (total sales) – (direct outgoings + Indirect outgoings) = ((800,000 x 5) – (500,000 + 400,000)) /5 = 620,000

= 620,000

Payback period = 750,000 / 620,000 = 1.21 years

Question 1b): Calculate the Net Present Value

Total revenue for the 5 years = (800,000) x 5 = 4,000,000

Total costs for the 5 years = (direct costs + indirect costs + building costs)

= 900,000 + 750,000 = 1,650,000

Before tax cash net flows = 4,000,000 – 900,000

= 3,100,000

Marginal tax = 37% = 1,147,000

After tax cash flow = 1,953,000

Net present value = Net cash inflow – initial outlay

= 1,953,000 – 750,000

= 1,203,000

Question 2) Based on the values of the Net Present Value and Payback period:

1. Should the project be accepted?

Yes the project should be accepted as it has a payback period of only 1 year and 2 months and has a positive net present value after the five years.

2. Define and describe the Net Present Value as it pertains to the new cafe

Kurt, 2017, defines NPV as the difference between the present value of cash inflows and the present value of cash outflows. It is given by the formula:


where Ct is the net cash inflow during period t, Co is the total investment costs, r the discount rate and t the number of time periods.

In regard to the new café, the value of NPV is positive thus indicating that the investment will be profitable. The value, 1,203,000 calculated shows that after the five-year period, profit of the said value will be obtained.

3. Define payback period. Assume the company has a payback policy of not accepting projects with life of over 3 years. Should the project be accepted?

EduPristine, 2017, defines it as the period required by a proposal to generate cash required to recover its initial investment. It is given by the formula:

Payback period = cash outlay (investment) / annual cash flow

Yes, the project should be accepted as it indicates a payback period of only 1.2 years which is less than the requirement set by the policy.


EduPristine. (2017).Capital Budgeting Techniques, Importance and Example.EduPristine blog on CFA, Financial Modelling, Digital Marketing, Business Analytics and Big Data.. Retrieved 6 June 2017, from http://www.edupristine.com/blog/capital-budgeting-techniques

Kurt, D. (2017).Net Present Value - NPV.Investopedia. Retrieved 6 June 2017, from http://www.investopedia.com/terms/n/npv.asp

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